Shares in the implant device juggernaut Cochlear Limited (ASX: COH) struggled to find range throughout 2021, trading sideways for the bulk of the year.
As signs of a recovery from the COVID-19 pandemic began to appear, elective surgeries – such as Cochlear's implant surgeries – began to normalise once more to start off 2021. This inflected positively on the Cochlear share price.
However, the demand-pull from COVID-19 continued to plague the Australian health system, and patient turnover from elective surgeries has been placed more or less in limbo for the time being.
Couldn't catch a bid
By the end of the year, Cochlear had pared gains achieved throughout 1H 2021. Back then, shares climbed the stairway upwards from early January and peaked at 52-week closing highs of $256.09 in August.
However, shares then turned down sharply following the release of Cochlear's FY21 results. Even though the company met its guidance throughout the P&L, analysts were baking in a more favourable result from the hearing implant giant.
For instance, implant unit sales grew 15% year on year to 36,546 while sales revenue came in 10% higher from last year.
The company also saw a 54% year on year increase in underlying net profit – ahead of company guidance – and grew its full year dividend by 60% to $2.55 per share.
Impressive results, although still well behind analyst forecasts. Not good enough according to the market.
Numerous studies have shown that investors tend to reward companies who post stronger than expected earnings, anticipating these to carry higher valuations into the future. Companies who 'miss' analyst estimates, therefore, tend to underperform expectations afterwards based on these studies.
As such, investors punished the company amid the earnings miss. Shareholders either exited or trimmed down positions resulting in a substantial plunge in its share price that remained in situ until December.
A market update towards the end of the year added more selling pressure from the top as well. The University of Pittsburgh claims that Cochlear has infringed on one of its patents. The company has strenuously denied the claims and states the patent is invalid.
Nevertheless, investors drove the Cochlear share price further into the red following the news, and have wiped $22 in value since that point.
What's the outlook for Cochlear in 2022?
Citi is neutral on Cochlear but is constructive on the shares in view of the company's business model. It notes a recent recall of a competitor's hearing implant offering, Demant.
The recall illustrates the competitive moat Cochlear has built around its surgeries and products after decades of optimisation through R&D, Citi says.
Despite the wind-back in elective surgeries over the last 2 years, Citi notes that Cochlear has still maintained around 65% market share of the implant segment throughout the pandemic.
It values Cochlear at $220 per share, whereas fellow brokers Macquarie and Jarden rate the company as a buy and assign $256 and $258 price targets respectively.
Goldman Sachs recognises the challenges Cochlear faces regarding its elective surgeries and reckons the company is a sell right now.
The firm says that revenue from Cochlear's surgeries remains exposed to the coronavirus due to their elective nature. This is an overhang that presents as a systematic risk to the company that cannot be diversified away, it says.
Goldman also reckons that the Cochlear share price is trading at a frothy valuation even considering the recent pullback. Add in the fact that Australian surgery numbers are yet to recover to pre-pandemic volumes, Goldman finds it hard to justify the high valuation.
